A software provider buys blank Bluray DVDs at $550 per hundred and currently uses 2 million DVDs per year. The manager believes that it may be cheaper to make the DVDs rather than buy them. Direct production costs (labour, materials, fuel) are estimated at $2.50 per DVD. The equipment needed would cost $3 million. The equipment should last for 15 years, provided it is overhauled every 5 years at a cost of $250 000 each time. The operation will require additional current assets of $400 000. The company's required rate of return is 12 per cent. Evaluate the proposal.
| Savngs per CD = (5.50-2.50) | 3 | ||||
| Number of Cds | 2000000 | ||||
| Annual savings | 6000000 | ||||
| Multiply: Annuity PVF at 12% for 15yrs | 6.81086 | ||||
| Present value of cash flows | 40865160 | ||||
| Present value of WC released (400000*0.182696) | 73078.4 | ||||
| Total Inflows | 40938238.4 | ||||
| Less: Outflows: | |||||
| Initial Investment | -3000000 | ||||
| WC investment: | -400000 | ||||
| PV of Overhauling at end of 5yr | -141857 | ||||
| (250000*0.567427) | |||||
| PV f Overhaling at end of 10th yr | -80493.3 | ||||
| (250000*0.321973) | |||||
| Total Outflows | -3622350 | ||||
| Net Present value | 37315888.4 | ||||
| Yes, the proposal is acceptable | |||||
A software provider buys blank Bluray DVDs at $550 per hundred and currently uses 2 million DVDs ...
A bicycle manufacturer currently produces 280 comma 000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $ 2.10 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $ 1.50 per chain. The necessary machinery would cost $ 269 comma 000 and would be obsolete after...
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